Benelux Germany UNCLASSIFIED Italy Romania Bulgaria STRONG SOLDIERS, STRONG TEAMS! Host Nation Relations Host Nation Relations Senior Board Senior Board Host Nation Relations Host Nation Relations Senior Board Senior BoardMonday, 4 August hrs Marshall Conference Room Marshall Conference Room MCC / Shali Center

STRONG SOLDIERS, STRONG TEAMS! UNCLASSIFIED As of 1 Aug 2014 Host Nation Relations Senior Board  BLUF: Close to a hundred US personnel (military, civilian, contractor employees, retirees) are facing potential taxation of their US Forces income by German Finance Offices.  The SOFA protects US Forces income from German taxation if the employee is in Germany “by reason solely” of US Forces employment.  The problem arose out of a German response to perceived tax evasion by US contractor personnel as a result of US outsourcing, but has expanded in scope to include direct hire personnel.  Certain actions can be taken by our personnel to limit their exposure to German taxation.  As the issue is personal, the ability of the command to influence the outcome is limited. Tax Issues Background, Current Trends

STRONG SOLDIERS, STRONG TEAMS! UNCLASSIFIED As of 1 Aug 2014 Host Nation Relations Senior Board The Tax Benefit: Art. X par 1 NATO SOFA “Where the legal incidence of any form of taxation in the receiving State depends upon residence or domicile, periods during which a member of a force or civilian component is in the territory of that state BY REASON SOLELY of his being a member of such force or civilian component shall not be considered as periods of residence therein, or as creating a change of residence or domicile, for the purposes of such taxation. Members of a force or civilian component shall be exempt from taxation in the receiving State on the salary and emoluments paid to them as such members….”

STRONG SOLDIERS, STRONG TEAMS! UNCLASSIFIED As of 1 Aug 2014 Host Nation Relations Senior Board Art. X para. 1 NATO SOFA: What it means  German Finance Courts currently interpret “by reason solely” in Art. X NATO SOFA to mean having the “intent to return” (to the US).  The “Intent to Return” (“Rückkehrwille”) test applies to uniformed members of the force and to members of the civilian component alike, and thus to Art. 71, 72, 73 SA employees, too.  “Intent to Return”(in the German view) must exist during EVERY tax year, not just at the end of the contract.  FULL burden of proof is on the “taxpayer”  Merely presenting an alternative view of the facts is insufficient. (Is the glass half empty or half full?”)  Problem: It’s a subjective standard and when in doubt, the Finance Office wins (99% of the time).

STRONG SOLDIERS, STRONG TEAMS! UNCLASSIFIED As of 1 Aug 2014 Host Nation Relations Senior Board “Intent to Return”  Some Criteria German Courts Consider:  Overall duration of stay in Germany (“5-year rule”)  Owning real estate in USA vs. real estate in Germany  (valid) US (state) driver’s license  Driving a car with US specifications  U.S. State income tax return filed with Federal 1040  Frequently traveling back to the USA  Participation in U.S. elections (continuing ties to the USA)  German spouse (and the amount of German spouse’s income)  Kindergeld, kids in German school; homeowner grants.  Witness testimony of neighbors and friends on German(dis)likes  Case-by-case analysis, There is no one decisive factor -- Even an actual return to the U.S. has been held to be inconclusive.

STRONG SOLDIERS, STRONG TEAMS! UNCLASSIFIED As of 1 Aug 2014 Host Nation Relations Senior Board What if Court finds no “intent to return?”  Generally, SOFA status remains unaffected, except Art. X tax exemption shield is gone.  World-wide income subject to unlimited German taxation.  Risk of in kind income (e.g., VAT-free shopping, gas-coupons,…) being added to gross income.  US/German Tax Treaty (TT) applies but provides no relief:  Art. 19 TT: Government Services does not apply to Art. 72, 73 SA employees.  Art. 15 TT: Personal Services:  Right of taxation rests with residency state (Germany)  Work is performed in Germany

STRONG SOLDIERS, STRONG TEAMS! UNCLASSIFIED As of 1 Aug 2014 Host Nation Relations Senior Board Way Ahead  If eligible, seek legal assistance from a Law Center host nation legal assistance attorney for initial advice.  Keep and document extensive ties with the U.S. to show “intent to return;” do not mark Bona Fide Resident on the IRS Form 2555 (Foreign Earned Income); do not accept German social benefits, especially if tied to residence.  DO NOT FILE A GERMAN JOINT TAX RETURN (Klasse III (the “kiss of death”) is a declaration of intent to be subject to unlimited taxation in Germany)  Last resort: inter-governmental talks (AMEMB Berlin)